Analysts place blame for profit drop on increased spending on new products like the Kindle Fire

Amazon released its fourth-quarter earnings from 2011 today, showing off its massive holiday success with e-readers and its Kindle Fire tablet, yet still missing previous estimates.

Amazon reported a 35 percent increase in net sales from $12.95 billion in Q4 2010 to $17.43 billion in Q4 2011. Despite the increase, the company missed Bloomberg analyst expectations of $18.3 billion.

Amazon also saw a 58 percent drop in quarterly profit from $416 million, or 91 cents per share, in Q4 2010 to $177 million, or 38 cents per share, in Q4 2011.

Amazon reported $260 million in Q4 2011 operating income, down from $474 million in Q4 2010. Operating cash flow increased 12 percent to $3.90 billion, up from $3.50 billion in 2010, and free cash flow fell 17 percent to $2.09 billion from $2.52 billion in 2010.

The online retailer ended Q4 2011 with 56,200 employees, which is a 67 percent increase from Q4 2010.

For the full-year 2011, net sales jumped 41 percent from $34.20 billion in 2010 to $48.08 billion in 2011. Operating income fell 39 percent to $862 million from $1.41 billion in 2010, and net income dropped 45 percent to $631 million ($1.37 per share) from $1.15 billion ($2.53 per share) in 2010.

While Amazon's first entry into the tablet arena, the Kindle Fire, was wildly successful with both Fire and other Kindle e-reader unit sales increasing 177 percent during the nine-week holiday period ending December 31, 2011 from the same period in 2010, the products were clearly slow to pay off. Increased spending on the Kindle Fire as well as other new products and facilities put a dent in the company's profits.

“We are grateful to the millions of customers who purchased the Kindle Fire and Kindle e-reader devices this holiday season, making Kindle our bestselling product across both the U.S. and Europe,” said Jeff Bezos, founder and CEO of Amazon.com. “Our millions of third-party sellers had a tremendous holiday season with 65% unit growth and now represent 36% of total units sold.”

Amazon predicts its Q1 2012 revenue to land between $12 billion and $13.4 billion with a $200 million operating loss and $100 million operating profit. Analysts were hoping for a Q1 2012 revenue of $13.41 billion.

quote: I think the initial investment that they have made with the Kindle Fire is going to pay off for them quite nicely. Sure, they have a lower quarter of profits initially, but with the content lock-in that to date only Apple has been able to pull off, this could be a major cash cow for them in the future.

You may be right but Amazon has been playing this game for a long time, building scale and volume on razor thin margins, and maybe that will pay off handsomely if Amazon become some sort of super monopoly of online shopping at some point in the future. But $260 million operating income on $17.43 billion seems awfully thin to me. Amazon is already a huge presence and accounts for a very significant slice of online shopping but it's business model is still not generating anything other than tiny profits (compared to turnover). Maybe if they can undercut and kill all real world retailers and move everything online and become the place to shop for everything they can make more profits but I am far from convinced that they can do that.

It's an interesting contrast between business strategies: Apple driving down content prices to build a content ecosystem to sell hardware versus Amazon driving down content prices to achieve scale, selling hardware at a loss and but making all their profits on content.

I'll agree that a 1% profit is pretty slim, but we can't compare Amazon completely to Apple. Amazon is a retailer of goods, and the margins just are not as high as they are in the Apple world (or Microsoft or the other tech giants).

Walmart, for instance, had profits of 3B on revenue of 109B. 3B is a lot of money, but that is only about 3% profit. Amazon's previous quarter (going off the numbers in the article) was 3.2% which I think would be what they are aiming for.

Exactly, Amazon cannot be compared with Apple, they are in two completely different businesses, retail and technology. As a result, investors shouldn't expect Amazon to ever be as profitable as any of the other major techs.

Amazon's market valuation kind of confuses me, it is being treated like a large cap tech but they don't generate anything close to a tech's profits. It has had an insanely high PE of 120-140 for ages now, and I wonder when investors are expecting the money to start rolling in to justify its valuation.

Amateurs on tech boards say AAPL is a high flier but it has a very low PE of around 12, very close to Microsoft's. The price may be high but they have the profits to more than justify it.

Anyway, by a retailer's standards, which is the business Amazon is in, they're doing well, and the low-to-zero margin niche that the Kindle Fire is in actually makes sense for them.